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AUDIT SAMPLING
The purpose of this Auditing and Assurance Standard (AAS) is to establish standards on
the design and selection of an audit sample and the evaluation of the sample results.
This AAS applies equally to both statistical sampling methods. Either method, when
properly applied, can provide sufficient appropriate audit evidence

When using either statistical or non-statistical sampling methods, the auditor

should design and select an audit sample, perform audit procedures thereon, and
evaluate sample results so as to provide sufficient appropriate auditevidence.

“Audit sampling” means the application of audit procedures to less than 100% of the
items within an account balance about some characteristic of the items selected in order
to form or assist in forming a conclusion concerning the population.

It is important to recognise that certain testing procedures do not come within the
definition of sampling. Tests performed on 100% of the items within a population do not
involve sampling. Likewise, applying audit procedures to all items within a population
which have a particular characteristic (for example, all items over a certain amount)does
not qualify as audit sampling with respect to the population examined, nor with regard to
the population as a whole, since the items were not selected from the total population on
a basis that was expected to be representative. Such items might imply some
characteristic of the remaining portion of the population but would not necessarily be the
basis for a valid conclusion about the remaining portion of the population.

FACTORS IN DETERMINING SAMPLE SIZE- SAMPLING RISK

When determining the sample size, the auditor should consider sampling risk, the
tolerable error, and the expected error.

SAMPLING RISK
Sampling risk arises from the possibility that the auditor conclusion, based on a sample,
may be different from the conclusion that would be reached if the entire population were
subjected to the same audit procedure.

The auditor is faced with sampling risk in both tests of control and substantive procedure
as follow:
(a) Tests of control:
(I) Risk of under reliance: The risk that, although the sample result does not support the
auditor’s assessment of control risk, the actual compliance rate would support such an
assessment.
(II) Risk of over reliance: The risk that, although the sample result supports the auditor’s
assessment of control risk, the actual compliance rate would not support such as an
assessment.

(b) Substantive procedures:

(I) Risk of incorrect rejection: The risk that, although the sample results the supports the
conclusion that a recorded account balance or class of transactions is materially
misstated, in fact it is not materially misstated.
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(II) Risk of incorrect acceptance: The risk that, although the sample result supports the
conclusion that a recorded account balance or class or transactions is not materially
misstated.

The risk of under reliance and the risk of incorrect rejection affect audit efficiency as they
would ordinarily lead to additional work being performed by the auditor, or the entity,
which would establish that the initial conclusions were incorrect. The risk of over reliance
and the risk of incorrect acceptance affect audit effectiveness and are more likely to
lead to an erroneous opinion on the financial statements than either the risk of under
reliance or the risk of incorrect rejection.

Sample size is affected by the level of sampling risk the auditor is willing to accept from
the results of the sample. The lower the risk the auditor is willing to accept, the greater
the sample size will need to be.

Tolerable Error
Tolerable error is the maximum errors in the population that the auditor would be willing
to accept and still conclude that the result from the sample has achieved the audit
objective. Tolerable error is considered during the planning stage and, for substantive
procedures, is related to the auditor's judgement about materiality. The smaller the
tolerable error, the greater the sample size will need to be.

In tests of control, the tolerable error is the maximum rate of deviation from a prescribed
control procedure that the auditor would be willing to accept, based on the preliminary
assessment of control risk. In substantive procedures, the tolerable error is the maximum
monetary error in an account balance or class of transactions that the auditor would be
willing to accept so that when the results of all audit procedures are considered, the
auditor is able to conclude, with reasonable assurance, that the financial statements are
not materially misstated.

Expected Error
If the auditor expects error to be present in the population, a larger sample than when no
error is expected ordinarily needs to be examined to conclude that the actual error in the
population is not greater than the planned tolerable error. Smaller sample sizes are
justified when the population is expected to be error free. In determining the expected
error in a population, the auditor would consider such matters as error levels identified in
previous audits, changes in the entity's procedures, and evidence available from
other procedures

SELECTION OF THE SAMPLE

The auditor should select sample items in such a way that the sample can be
expected to be representative of the population. This requires that all items in the
population have an opportunity of being selected.

19. While there are a number of selection methods, three methods commonly used are:
Random selection, which ensures that all items in the population have an equal chance
of selection, for example, by use of random number tables.

Systematic selection, which involves selecting items using a constant interval between
selections, the first interval having a random start. The interval might be based on a
certain number of items (for example, every 20th voucher number) or on monetary totals
(for example, every Rs 1,000 increase in the cumulative value of the population). When
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using systematic selection, the auditor would need to determine that the population is not
structured in such a manner that the sampling interval corresponds with a particular
pattern in the population. For example, if in a population of branch sales, a particular
branch's sales occur only as every 100th item and the sampling interval selected is 50,
the result would be that the auditor would have selected all, or none, of the sales of that
particular branch.
Haphazard selection, which may be an acceptable alternative to random selection,
provided the auditor attempts to draw a representative sample from the entire population
with no intention to either include or exclude specific units. When the auditor uses this
method, care needs to be taken to guard against making a selection that is biased, for
example, towards items which are easily located, as they may not be representative.

EVALUATION OF SAMPLE RESULTS

Having carried out, on each sample item, those audit procedures that are
appropriate to the particular audit objective, the auditor should:
(a) analyse any errors detected in the sample;
(b) project the errors found in the sample to the population; and
(c) Reassess the sampling risk.

Analysis of Errors in the Sample

In analyzing the errors detected in the sample, the auditor will first need to determine that
an item in question is in fact an error. In designing the sample, the auditor will have
defined those conditions that constitute an error by reference to the audit objectives. For
example, in a substantive procedure relating to the recording of accounts receivable, a
mis-posting between customer accounts does not affect the total accounts receivable.
Therefore, it may be appropriate to consider this an error in evaluating the sample results
of this particular procedure, even though it may have an effect on other areas of the audit
such as the assessment of doubtful accounts.

When the expected audit evidence regarding a specific sample item cannot be obtained,
the auditor may be able to obtain sufficient appropriate audit evidence through
performing Alternative procedures.
.
The auditor would also consider the qualitative aspects of the errors. These include the
nature and cause of the error and the possible effect of the error on other phases of the
audit.
In analysing the errors discovered, the auditor may observe that many have a common
feature, for example, type of transaction, location, product line, or period of time. In such
circumstances, the auditor may decide to identify all items in the population which
possess the common feature, thereby producing a sub-population, and extend audit
procedures in this area. The auditor would then perform a separate analysis based on
the items examined for each sub-population.

Projection of Errors
The auditor projects the error results of the sample to the population from which the
sample was selected. There are several acceptable methods of projecting error results.
However, in all the cases, the method of projection will need to be consistent with the
method used to select the sampling unit. When projecting error results, the auditor needs
to keep in mind the qualitative aspects of the errors found. When the population has
been divided into subpopulation, the projection of errors is done separately for each
subpopulation and the results are combined.
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Reassessing Sampling Risk

26. The auditor needs to consider whether errors in the population might exceed the
tolerable error. To accomplish this, the auditor compares the projected population error
to the tolerable error taking into account the results of other audit procedures relevant to
the specific control or financial statement assertion. The projected population error used
for this comparison in the case of substantive procedures is net of adjustments made by
the entity. When the projected error exceeds tolerable error, the auditor reassesses the
sampling risk and if that risk is unacceptable, would consider extending the audit
procedure or performing alternative audit procedures.